Mirroring trends across the global hedge fund industry, investors redeemed over USD5.2bn in capital from funds investing in emerging markets.

When performance-based asset losses are included, capital invested in emerging markets hedge funds fell over 33 per cent to under USD75bn, less than five per cent of all hedge fund capital and an absolute level not seen since end of 2006.

Total capital invested in hedge funds globally has fallen by 19 per cent over the same four-month period ending October.

Asset declines were widespread across all emerging market regions and strategies, but the most severe losses were in equity hedge funds, in which assets fell by over USD23bn, and in funds focused on Russia & Eastern Europe, in which assets fell by over USD12bn.

While emerging markets hedge funds have declined over 34 per cent over the last 12 months, the losses have still not exceeded the losses from the financial crisis of 1997-98, at which time emerging markets hedge funds declined over 43 per cent, says Hedge Fund Research.

The recent results contrast sharply with prior years, with 2007 ending a four-year period in which hedge funds investing in emerging markets posted annualized gains of better than 25 per cent, making it the best performing hedge fund strategy over that time.

Even inclusive of the 2008 losses, many emerging markets regions continue to show intermediate gains.

Despite a decline of nearly 50 per cent for the year, the HFRI Emerging Markets: Russia/Eastern Europe Index has produced an annualized gain of 13.4 per cent (87.5 per cent cumulatively) over the past five years, far in excess of the 0.3 per cent (1.3 per cent cumulatively) gain for the S&P 500.

Funds investing in Asia (ex-Japan), Latin America and the Middle East show similar return profiles.

Ken Heinz, president of HFR, says: 'Emerging market underpinnings of secular growth and improved fundamentals were ignored and overwhelmed by fear and risk aversion. In a tumultuous flight to quality, investors looked to liquidate portfolios of any risky assets in favor of the perceived security of developed government bonds, and emerging markets hedge funds were some of the most heavily impacted by this. Risk, of all types, was out of favour in the third quarter.'